{"id":58237,"date":"2023-02-16T09:00:47","date_gmt":"2023-02-16T14:00:47","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=58237"},"modified":"2023-02-15T11:32:17","modified_gmt":"2023-02-15T16:32:17","slug":"higher-rates-are-here-to-stay","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2023\/02\/higher-rates-are-here-to-stay\/","title":{"rendered":"Higher Rates Are Here To Stay"},"content":{"rendered":"

If you believe what the inverted Treasury yield curve is saying, you must believe that, eventually \u2014 but probably sooner rather than later \u2014 the Federal Reserve will start lowering interest rates in response to the economic recession it will have caused by raising rates by more than 400 basis points in the past year. <\/p>\n

But based on the strength of the economy despite those higher rates, it\u2019s looking more like rates well above 4% - and possibly 5% \u2014 are going to be around for a long time to come. <\/p>\n

But that\u2019s not necessarily such a bad thing. For all those younger than 40, 4-5% long-term interest rates had been the norm for decades. <\/p>\n

It\u2019s only in this century that we\u2019ve become accustomed to super-low interest rates, engineered by an activist Fed to insulate consumers and the financial markets from seemingly one financial crisis after another. <\/p>\n

<\/div>\n

But that era looks to be over. And it looks like we\u2019re managing.<\/p>\n

Even though inflation appears to have peaked and is moving steadily downward, the Fed is likely to keep rates fairly high for quite a while, certainly the rest of this year and probably 2024 and beyond, absent yet another global financial crisis, to make sure the inflationary beast is truly slayed. <\/p>\n

Even on the unlikely chance that the federal government defaults on its debt later this year if Congress can\u2019t agree to raise the debt ceiling, the Fed isn\u2019t likely to start lowering rates for a long time, despite what many investors hope and the inverted yield curve would indicate.<\/p>\n

As we know, an inverted yield curve is when short-term rates are higher than long-term rates, which is the exact opposite of the natural order of things. <\/p>\n

Long-term debt usually carries higher rates because a lot more can go wrong over, say, 10 or 20 years, than it can over just a couple of years or less. But that\u2019s not what we have now. \u00a0<\/p>\n

Long-term rates are lower than short-term because bond traders and investors believe that the Fed will throw the economy into recession, and then have to backtrack and start lowering rates, maybe in a year or two. <\/p>\n

So better grab those high rates on short-term bonds now because you\u2019re not going to be able to enjoy them for long.<\/p>\n

But the economy doesn\u2019t appear to be cooperating. January\u2019s jobs market report was very strong. Employers outside the big tech companies are still in hiring mode. <\/p>\n

Economic prospects might not be as vibrant as they were maybe a year or so ago, when we were pulling out of the pandemic lockdown, but they\u2019re still pretty robust. Which means that the Fed is likely to keep rates high for a lot longer than investors believe. <\/p>\n

Right now, the economy seems to be surviving. Despite fears that millennials and younger, less experienced, corporate chieftains wouldn\u2019t know how to cope with interest rates that were higher than zero, that doesn\u2019t seem to be the case. Corporate earnings are still pretty strong. Bond defaults are minimal. <\/p>\n

So there\u2019s little pressure on the Fed to start lowering interest rates, even as a humanitarian gesture.<\/p>\n

Except maybe from the fiscal side of the government. <\/p>\n

It hasn\u2019t happened yet, but look for Congress and the White House \u2014 despite their avowed reverence for Fed independence \u2014 to start ratcheting up the pressure on Fed Chair Jerome Powell to lower rates in order to help manage the ever-burgeoning federal debt load, which is only getting worse the higher and longer interest rates stay elevated, on top of all the other spending lawmakers are enacting.<\/p>\n

For the past 20 years or so, Washington has been able to put Modern Monetary Theory \u2014 basically, the idea that government deficits and spending don\u2019t matter \u2014 into practice because zero percent interest rates engineered by the Fed have enabled it. <\/p>\n

But that\u2019s not the case anymore \u2014 quite the opposite, in fact. <\/p>\n

Higher rates paid by the U.S. Treasury on its debt are only making the deficit even worse. And sorry, folks, extending the debt ceiling isn\u2019t going to much matter, except to once again kick the proverbial can down the road. <\/p>\n

<\/div>\n

We\u2019ll simply have more and more government debt incurring a higher price, which will only balloon the federal debt load at an even faster pace, even without any new spending. <\/p>\n

As we already know, most of the federal budget\u2014meaning Social Security, Medicare and the military establishment\u2014have been declared off-limits from spending cuts, which doesn\u2019t leave much else for pruning. <\/p>\n

If Powell thought the past five years of his tenure have been pressure-packed, he hasn\u2019t seen nothing yet. <\/p>\n

The only way he lowers rates is with a monumental cave-in to both Washington and Wall Street, and right now he doesn\u2019t seem likely to accommodate them.<\/p>\n

George Yacik<\/a>
\nINO.com Contributor<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

If you believe what the inverted Treasury yield curve is saying, you must believe that, eventually \u2014 but probably sooner rather than later \u2014 the Federal Reserve will start lowering interest rates in response to the economic recession it will have caused by raising rates by more than 400 basis points in the past year. 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